The Tamil Nadu (TN) government has brought out a white paper, the equivalent of an economic survey but with much better precision and more readability, on the state of its economy, which the finance minister (FM) of the newly elected government committed to bring out before the presentation of the state’ annual budget by the new government.
The comprehensive document, extending well over a hundred pages, captures almost all the vital aspects of revenue and expenditure over the past fifteen years, covering the 10 years of the previous AIADMK government from 2011 -2021 and the preceding five years of the DMK government between 2006-2011.
As the data has been elaborately presented and analysed, it would be a tedious repetition to even spell out the highlights again. The full document is supplemented by a slide-show presentation made to the media today and all the critical data is available in the shorter version.
The main takeaway is the ballooning government debt that has reached over 27% of the gross state domestic product (GSDP) by 31 March 2021, contributed by the rapidly galloping revenue deficit in the last 10 years. The fall in the revenue collection disproportionate to the overall growth in the economy (though it had considerably slowed down in the five years between 2016 and2021) resulting in tax buoyancy in lower decimals is perhaps the biggest malaise needing attention.
TN, a state which historically had a high ratio of its own tax revenue to the total revenue of the state has badly slipped in the recent few years, to fall well behind its peers like Karnataka, Maharashtra and Gujarat. The problem also stood compounded by the lower share in Central taxes due to the change in the devolution formula post the 14th Finance Commisson (FC), and the lack of growth under other revenue heads like road taxes and property taxes.
Similarly, the contribution of non-tax revenues, like mining royalties, has resulted in the revenue growth falling well behind the pace at which the expenses grew.
The villain on the expenses side has been the mounting subsidy for the power sector and devolutions to local bodies which failed to exploit their own sources of revenue and relied on transfers. The report, in its current content, is essentially like the clinical report on factual readings on an individual undergoing a master health check up. Such clinical reports seldom give the reasons for the abnormal parameters, nor the prescription for correcting or curing it. That is left to the diagnosis by a competent medical expert or a specialist and perhaps needing further tests not covered in the first instance.
But the following observation in the report towards the final pages sums up that drastic action and fundamental reforms that would be urgently needed to address the crisis.
“Business-as-usual cannot continue, and our approach must fundamentally change if we are to break out of this vicious cycle of increasing debt and interest costs. On the other hand, this is an opportunity to effect “once in a generation” reforms, many of which should have been undertaken years ago by any responsible Government.”
The concerned public may need to wait for the Budget and the announcements that follow to fully understand the seriousness with which the government intends to address the problem which it has so viscerally exposed to public view.
In the next few paragraphs, some thoughts are shared on the potential areas of solution.
The fiscal space has been considerably cramped by the interest burden on the debt of almost Rs6 lakh crore as on date. Increased growth in the coming years may help bring down the percentage of the debt to GSDP. However, achieving growth without investments by the state in improving the human capital through better education, health infrastructure and housing, will be next to impossible. Thus, the quality of expenditure should change from unproductive interest payments to productive developmental outlays.
This would necessitate immediate reduction of the debt burden by making bullet payments than progressive reduction. This implies that the government should raise significant one-time resources through sale of capital assets. From the look of it the disinvestments in state public sector units (PSUs) may not yield much as very few are productive ones. But that should be fully explored, shedding the political stigma going with such a decision. If the party has been strident in opposing the Centre in its disinvestment agenda it needs to admit its error and own up to the inevitability of this step to rescue the economy.
The other concomitant to disinvestment is the liquidation of the very valuable real estate that the government owns to house its offices. Some of these can yield disproportionately high values on sale and the government offices can be relocated to the outskirts. With more ability to work remotely, the government should appoint a committee to come up with at least a resource raising of a targeted amount of, say, Rs2 lakh crore in the next three years through this.
Zero-based budgeting on all expense heads to achieve a targeted 15%-25% saving in the next three years, other than on interest cost, should be another exercise. The biggest element in expense control is the power subsidy and the ongoing haemorrhage in TANGEDCO, the power generating unit. It is imperative that the power sector operates at least on a break even on revenue and relies on the state support only for fresh capital additions.
Restructuring the revenue is the biggest challenge given the loss of fiscal domain due to GST (goods and services tax). While the 14th and 15th finance commission have significantly affected the interest of better performing states like TN by the revised devolution formula, it may need to await major political changes to alter and may in fact not happen at all.
Therefore, the state would need to put in place measures to exploit its own sources of revenue on a war footing. The paper has identified property tax and road tax as needing correction and the fact that states like Maharashtra and Karnataka successfully collect more from these avenues should lend urgency to this being tapped fully.
Similarly, resources of the state like minerals should be allowed to be exploited after sharing a reasonable moiety to the government. Agriculture suffers no tax and has been a conduit for tax evasion. Rich farmers can be taxed on a rational scale and the political hesitation to tap this should be shed quickly.
The TN and other governments should pressurise the union government to change its distorted tax structure of employing cesses and surcharges that are not shared with the states. The option of a legal solution should be explored as well.
While the vision has to be long term, the sight has to be lowered to observe all the pitfalls on the way!
The subject having just started and with a finance expert at the helm as FM, there would be no dearth of news on the TN finance front in the coming days!